What is ‘investing’ and is it right for you?

There’s often a bit of an incorrect perception when you mention ‘investment’ to people. There’s an impression that the word is reserved for business moguls who are putting capital into new businesses – or even cash rich individuals who are exchanging money for commodities and ‘playing the market’.

The reality is very different. Everyone’s likely to invest at some point in their life – it’s just that we don’t consider buying a house or opening a savings account to be an investment.

We’ll run you through the most popular kinds of investment, explain what’s involved and help you work out which, if any, is right for you.

What is an investment?

At its most basic level, the term ‘investment’ is something you put your money into to get an increased return. They typically come in one of four types with varying levels of risk:

Cash – By placing your money into a bank or building society account you’re actually investing it – behind the scenes, the bank using the money they have to invest further – they make a large return and offer you some of their profit in the way of interest. This is considered a low risk investment.

Property – Although it might not be the primary reason for the purchase, when you buy property you’re investing in the bricks, mortar and land – with the likelihood that it will be worth more than you paid when it’s sold on. There are a lot of variables, not least with the country’s economy – but property is generally considered a safe investment if bought properly.

Shares – Buying a stake in a company is normally done with the belief that the company will grow in size and value, thus making the share you hold worth more than the moment it was purchased. Markets and company performance are extremely unpredictable – and trading in shares is therefore considered a high-risk investment.

Securities/bonds – Buying bonds or securities is a little like loaning your money to a company or government with an ‘IOU’ note in return. The time period and value/return is set in advance – with your money and interest being returned at this stage. Securities and bonds are generally considered much lower risk than trading in shares.

True ‘investing’

There’s plenty of great information already available online about saving, savings accounts and purchasing property – so we’ll concentrate on trading in stocks; what most people consider to be the real meaning of investing.

Before we continue, it’s really important to understand what this kind of investment is: It’s essentially gambling – you’re placing your money with the hope that the investment returns a greater amount – but, it’s just as possible that money invested will return nothing at all. You should not invest money that you cannot afford to lose.

Even billionaire investors agree that the stock-market trading floors you see in movies aren’t an accurate representation of investing in real life – the truth is frankly more boring, carefully selecting an attractive company, buying shares and then, well… waiting.

When you’re done with waiting, the advice is usually to wait to some more. Although in the short-term shares might fluctuate, they’re unlikely to deviate massively, which means holding on to them for years is often the way to see a reasonable amount of growth.

The stock market

Although the intricacies are much more complex, a stock market is a place where buyers and sellers exchange shares. Companies release these shares to build the amount of capital they have to develop their business. So, you buy a share and you become a shareholder – albeit a very small one.

Although the share information you see on the financial news only covers the large or significantly newsworthy companies and share values, you can check a company’s share price at any time.

There are lots of factors that will dictate the value of the share; the country’s general economic state, the company’s financial performance and the behaviour of other shareholders all contribute to the ‘sentiment’ of the market – the overall attitude toward the shares and therefore, the desirability and the price.

Making a profit

No one can tell you how much you’ll make or lose when you’re investing. Some of the most complex computer code ever written is made for predicting upward trends in share prices – and even that won’t perform all the time.

Once again, it’s important to remember that money invested in shares is a gamble – maybe you’ll make a fortune, maybe you’ll lose a fortune. Risking more than you can afford to lose is an easy way to end up with unmanageable debt. You can find out about more about debt management strategies online elsewhere. Even an investment in a company that’s performed well for years doesn’t predict that share’s performance tomorrow, so be careful.

Shares tend to deviate in price just a few percent in the short term – whereas they’ll typically increase or decrease more significantly over 5 or 10 years.

Experts will generally tell prospective investors to invest widely – thus mitigating the risk of one company or industry performing poorly. Monitoring a share or share portfolio is also important, the risk that relates to shares changes with the market – and you should only continue on a basis you’re happy with.

What’s right for you?

For most people, starting with an ISA is a good place to invest. While interest rates might not look amazing when compared to the returns you could get with some well bought shares, there are a couple of things you can be certain about.

Firstly, money that is invested in an ISA is tax exempt – which isn’t the case for the profitable return on shares. Although an ISA’s interest rate might be low, the big tax saving often makes up for it.

Secondly, an ISA is about as safe an investment as you’re ever going to find – so if the idea of risk is a scary one, an ISA means you can sleep soundly.

If you’re going to explore stocks and shares – remember to only ever invest what you can afford to lose, oh, and be very wary of ‘sure things’ that you might hear people talking about or have recommended to you – there’s no such thing as certainty in trading – if there were, we’d all be millionaires!